Disruption to jet fuel supply is expected from “early May” if the US-Israel war on Iran continues beyond April, Ryanair chief executive Michael O’Leary said on Wednesday, giving rise to fears the air fares could be about to skyrocket ahead of the summer.
“We don’t expect any disruption until early May, but if the war continues, we do run the risk of supply disruptions in Europe in May and June, and we hope the war will finish sooner than that and the risk to supply will be eliminated,” he said.
“We think there is a reasonable risk, some low level, maybe 10-25 per cent of our supplies might be at risk through May and June, so, like everyone else in this industry, we hope the war ends sooner rather than later.
“If the war finishes by April and the Strait of Hormuz reopens, then there is almost no risk to supply.”
What do we know about the situation so far?
Jet fuel prices have roughly doubled in major markets since the onset of the war, driven by an effective blockade of the Strait of Hormuz, through which about 20 per cent of the world’s traded jet fuel supply normally passes.
[ Jet fuel supply disruption expected, Ryanair chief saysOpens in new window ]
Eoghan Corry, travel writer and owner of the TravelExtra trade magazine, said the price of jet fuel has climbed faster than the price of crude oil and airlines are “already getting milked for that”.
Will that lead to higher air fares?
Carriers in some regions are already passing on the extra cost to passengers, International Air Transport Association (IATA) chief Willie Walsh, whose organisation represents 85 per cent of the world’s airlines, said in recent weeks.
Indeed, the knock on effect is already showing. Hong Kong’s Cathay Pacific, Australia’s Quantas, Malaysia’s AirAsia, Scandinavian airline SAS, and Air New Zealand have all implemented temporary or permanent surcharges based on air fuel increases.
Iran’s cyber-attacks on Irish-based companies and the ongoing impact of conflict in the Middle EastWhat about fares on this side of the world?
International Energy Agency head Fatih Birol said on Wednesday the lack of jet fuel and diesel will hit Europe “in April or May”.
When demand outstrips supply, prices tend to rise, but it isn’t as simple as that in this case because of a practice called “hedging”, which is when airlines buy large quantities of fuel at set prices to avoid volatility like that which we’re seeing now.
Walsh said Irish and European travellers have a “little bit more time” because of hedging.
But fuel accounts for 26 to 27 per cent of airlines’ costs, and, as margins are already tight, Walsh said airlines would have no choice but to increase fares. “It’s happening now,” he added.
O’Leary said Ryanair is “reasonably well hedged” on 80 per cent of its fuel but is paying almost double at around $150 (€129) a barrel on the other 20 per cent. That being said, he doesn’t expect to cancel any flights.
O’Leary was travelling on Wednesday and so Ryanair said it was unable to provide any additional clarity on what it might mean for air fares, except to say: “We are well hedged at $67 per barrel for the next 12 months so won’t affect our costs or our low fares.”
However, Corry is less clear cut. “Ryanair is well hedged for 80 per cent, but if you’re 20 per cent is costing three times the price of your 80 per cent, it’s still going to impact on your bottom line,” he said. “The first thing that will happen is higher prices will land on the tickets.”
Aer Lingus did not respond to questions on its own hedging arrangements, except to say that while increases in fuel prices “can cause fluctuations in fares”, its fares “remain very competitive and comparable to the same period last year”.
[ Inflation could climb above 4% if Iran conflict is prolonged, Central Bank warnsOpens in new window ]
What about cancellations?
Well, as mentioned, Ryanair is insisting it won’t have to cancel any flights, but if airlines have less access to affordable fuel and it becomes unprofitable for them to put flights on, there will only be one outcome. “It means cancelled flights,” said Corry.
“It could be a percentage of the overall flights on an itinerary. When airlines cancel flights due to strikes they look first at the fat routes and try and minimise the impact by cutting the number of flights out of Heathrow for example from 11 to eight.
“The next thing they will look at is the marginal and not very profitable routes and they could be cancelled.”
Corry said that since the pandemic the booking pattern for flights has become much later than it used to be.
“That means if they start cutting flights from certain routes, like Malaga for example, they would just stop taking bookings once five flights are full whereas in the past they might have had eight flights a day.”
Could the airlines tackle the issue by consolidating flights?
Corry is of the view airlines won’t consolidate unless the supply issue worsens. “Merging flights happens routinely but it could happen more frequently in the weeks to come and is probably more likely on the very heavily trafficked routes,” he said.
“Airlines can cancel flights without having to pay compensation if they give two weeks’ notice to consumers and up to that point they have considerable leeway.”
Could Irish airlines hit customers with surcharges to recoup their losses?
When there have been fuel price spikes in the past we have seen fuel surcharges added, even after bookings were made, and Corry said we might see that happening this time too.
“We have never seen Ryanair do that but it happened with tour operators and some legacy carriers with €20 per person or thereabouts added to the price of holidays and flights already booked,” he said. “That might be a worst-case scenario.”
What are the chances all of this will settle down in time for the summer?
We know US President Donald Trump is feeling the heat from voters when it comes to oil and gas prices, and he has pivoted from demanding Iran’s “total surrender” to floating the idea of leaving within weeks even in the event a deal cannot be struck with the Gulf nation.
Trump has in all likelihood correctly predicted the price of oil will shoot down when the Iran crisis comes to an end, and the same is likely true of jet fuel.
However, Corry said people with flights booked have no choice but to “sit tight” while those waiting to book should do so sooner rather than later with “multiple pressure points potentially driving up prices in the weeks ahead”.